Purchasing data shows local economy improving
Still improving. That's the latest word on the Greater Grand Rapids economy, according to the data collected in the last two weeks of September. New orders, our closely watched index of business improvement, rose to +31, the highest the index has been since May 2006. The production index fared better as well, rising to +38 from +34. Activity in the purchasing offices moderated to +24, down from +33. The index of employment remained positive for the second time in two years, although it moderated to +14 from +19. Just as last month, 31 percent of respondents reported that employment levels are rising.
Turning to individual industries, new orders are still up for many of the auto parts suppliers, although many of these firms are justifiably worried that production schedules will be cut if auto sales continue to slide. Once again, better performance by many firms in our survey spilled over to make it a very good month for many of our industrial distributors. In general, the capital equipment firms remain flat, but one firm was up nicely. Although the major office furniture companies are now relatively stable, they have a long way to go to get back to sales levels reached in 2003-2006.
At the national level, the Oct. 1 press release from the Institute for Supply Management, our parent organization, shows that the national economy remains positive, although it is experiencing a few headwinds as the recovery unfolds. ISM's index of new orders moderated to +22 from +27. In a similar move, the production index came in positive but eased to +18 from +25. ISM's employment index remained negative, and eased to -8 from -6. These moderating statistics resulted in ISM's overall Index of Manufacturing adding up to 52.6, down from 52.9.
The news at the international level continues to be positive. The composite index for J.P. Morgan's Global Manufacturing Report dated Oct. 1 came in at 53.0, down very modestly from the 53.1 reported last month. Since an index above 50.0 is break-even, JPM's September index for new orders, at 57.4, indicates that the world economy is well on its way to recovery. In addition to the U.S., business conditions improved in India, China, Japan and the composite Eurozone. Declining countries included Italy, Denmark, Ireland and Spain. Because the overall index remained virtually unchanged, the survey author noted that "global PMI stalled in September after many months of gain." He went on to note that "output and orders are extremely elevated, consistent with robust growth in current and near-term manufacturing activity."
Unfortunately, the news from the automotive sector is not so good. Although the Cash for Clunkers program boosted August sales, it is now apparent that at least some of the sales that would have occurred in September and October were merely brought forward. Although part of the problem can be attributed to low dealer inventories at the beginning of September, the lingering problems of tight credit and weak consumer confidence certainly contributed to the poor September performance. Ford, which had posted a 17.2 percent year over year gain in August, declined 5 percent. Sales for General Motors fell 45 percent. Chrysler fell 42 percent. The previous stalwarts of success, Toyota and Honda, declined 13 and 20 percent, respectively. Although Hyundai gained 26 percent, the performance was well below last month’s 52 percent gain. For the industry as a whole, September sales fell 23 percent. This is on top of a 25.4 percent drop in September 2008. The "annualized" rate of sales is now down to 9.3 million units per y
ear, or about 40 percent lower than the sales in the 2005-2006 periods. Even in the good times three years ago, there was talk of overcapacity in the industry. Hence, even if we do get some modest recovery in auto sales over the next few months, we are still looking at additional plant closures until supply and demand get in balance. This is not good news for Michigan. In the very broadest sense, the auto industry is suffering from the same excess capacity and subprime loan problems that the housing industry has experienced since the bubble broke in 2006.
On a sad note, it now appears that the Saturn subsidiary of GM will not be sold to Penske and will instead be closed. Although the firm reached a high of 286,000 units in 1994, sales did not expand in recent years. With three months to go in 2009, only 57,000 units have been sold.
For good reason, there has been a lot of talk about a return to inflation. So far, our statistics have remained relatively stable. At ISM, the index of prices for September came in at +27. For Southwestern Michigan, we recorded +15. In Grand Rapids, the September index was +19. By historical standards, these numbers are no cause for alarm. What is more troubling is the fact that lists of commodities in short supply and the commodities up in price for all three reports are growing in size. Furthermore, they contain many "big ticket" items like copper, steel and plastic resins. The Fed governors have generally indicated they do not intend to let inflation get out of control and will probably raise interest rates if things start to get out of hand. Since we live in an era when business conditions can turn up or down very quickly, we will need to watch the inflation situation very carefully. Although unbridled inflation could spawn a run on the dollar, an increase in interest rates could halt our recovery.
Where does all of this leave us? We are in uncharted territory. The international economy is improving, which is good for the U.S. and Michigan economies. However, the most recent auto sales reports will probably put pressure on our auto parts producers in the near future IF sales remain flat. Although some of our other industries are starting to recover, it seems improbable that they can offset a decline in automotive enough to continue. The recovery will probably continue, but it may be slower and bumpier than we hoped.
Brian Long is director, Supply Chain Management Research, Seidman College of Business, Grand Valley State University.